SUPERANNUATION 

IN  THE 

CIVIL  SERVICE. 

i l , ■ y-  , 


REPORT  OF  A SPECIAL  COMMITTEE 

OF  THE 

National  Civil  Service  Reform  League 


19  0 7 


0 


35\.5 

./V 

1^0 


SUMMARY 

of  the 

Report  of  the  Superannuation  Committee  of  the  National 
Civil  Service  Reform  League  on  the  Plan  of  Old 
Age  Pensions  formulated  by  the  Sub-Com- 
mittee of  the  Keep  Committee  on 
Department  Methods* 


The  Facts. 

The  superannuation  reports  of  the  League  in  1901 
and  1900  show  that 

(a)  the  operation  of  the  Civil  Service  Law  has  neither 
caused  nor  increased  superannuation ; 

(b)  superannuation  in  the  national  civil  service  is 
small,  only  1.2  per  cent*  of  the  employees  being  over 
70  years  of  age; 

(c)  this  percentage  has  not  been  increasing; 

(d)  the  total  loss  through  old  age  inefficiency,  ex- 
pressed in  terms  of  salary,  is  less  than  1 per  cent,  of 
the  salaries  paid;  and  that 

(e)  there  is  no  such  pressing  need  of  old  age  provision 
as  to  involve  the  government  in  any  considerable 
expense. 

The  Keep  Subcommittee's  Plan. 

The  plan  of  the  Sub-Committee  of  the  Keep  Com- 
mission seeks  to  provide  tor  old  age  mainly 

By  the  government  hereafter  holding  back  each 
month  a portion  of  the  salaries  due  its  employees 
and  ultimately  repaying  these  forced  loans  with  4 
per  cent,  interest  compounded  annually;  and 

By  giving  to  each  employee  already  in  the  service 
when  the  plan  goes  into  effect  (and  whose  salary  up 
to  that  date  will,  of  course,  have  already  been  paid) 
as  a pure  gratuity  on  his  attaining  the  retiring  age 


11 


in  the  government’s  service  a supplementary  annuity 
a little  larger  than  ii  the  plan  had  been  in  force  when 
he  entered  the  government’s  employ. 

The  total  cost  of  these  supplementary  annuities  it 
is  estimated  will  be  in  the  end  from  $50,000,000 
to  $60,000,000. 

Bach  employee  hereafter  separated  from  the  service 
for  any  cause,  at  any  age,  and  in  case  of  death  his 
estate,  is  to  receive  back  the  amount  of  his  forced 
monthly  loans  with  4 per  cent,  compound  interest. 

Criticism . 

(1)  Resignations  are  far  too  numerous  now  among 
the  more  efficient  amounting  to  almost  8 per  cent,  ot 
the  whole  number  of  employees  annually.  (See  pp.  7 -8.) 

(2)  The  holding  back  by  the  government  of  a por- 
tion of  an  employee’s  salary  with  a guaranty  to  return 
it  at  any  time  with  4 per  cent,  compound  interest  if  he 
leaves  the  service  offers  a premium  for  his  resignation. 
(See  pp.  7-8) 

(3)  A good  pension  system  will  not  only  weed  out  the 
superannuated  but  will  tend  at  the  same  time  to  keep 
in  the  most  efficient,  and  will  not  give  special  induce- 
ments to  the  most  efficient  to  resign,  leaving  the  least 
efficient,  not  good  enough  to  be  in  demand  outside,  as 
the  only  ones  to  remain  in  the  service  until  old  age. 
(See  pp.  7-8) 

(4)  It  might  prove  an  economic  gain  to  the  govern- 
ment to  make  the  proposed  gratuity  of  fifty  to  sixty 
millions  of  dollars,  which  the  plan  provides  shall  be  dis- 
tributed among  those  now  in  the  service  and  remaining 
until  they  attain  the  age  of  seventy,  provided  that  this 
were  the  only  expense  of  the  plan  and  that  without 
further  burden  upon  the  taxpayer  this  expenditure 
would  surely  eliminate  from  the  service  inefficiency 
through  superannuation.  But  sixty  million  dollars  are 
an  insignificant  matter  in  comparison  with  the  enor- 
mous cost  of  the  whole  plan.  (See  pp.  6,  9-13.) 

(5)  The  4 per  cent,  compound  interest  proposed  to  be 
paid  to  its  employees  by  the  government,  w hich  pays 
only  2 per  cent,  on  its  bonds  sold  to  outsiders  would 
cost  the  taxpayers  several  hundred  millions  of  dollars 


Ill 


before  even  those  now  in  the  service  had  all  died.  (See 
pp.  9-13.) 

(6)  The  government  is  to  pay  annuities  based  upon 
what  insurance  companies  earn  from  their  investments. 
This  is  very  much  in  excess  of  anything  the  government 
can  be  said  to  earn.  This  involves  a heavy  loss  to  the 
taxpayer.  (See  pp.  12-13) 

Recom  m en  da  tion  s. 

(1)  The  League  recommends  again  the  Australian 
system,  under  which  the  government  employees  would 
be  required  to  take  out  deferred  annuities  trom 
insurance  companies,  payable  at  the  age  of  70, 

(2)  to  be  supplemented  by  a gift  of  annuities  trom  the 
government  to  those  already  in  the  service,  as  in  the 
Sub-committee’s  plan, 

(3)  the  insurance  companies  to  make  deposits  from 
time  to  time  with  the  United  States  treasury  to  secure 
these  annuities, 

(4)  and  also  to  issue  these  policies  at  reasonable  rates, 
before  being  allowed  to  undertake  the  business. 

(5)  These  annuities  can  be  made  as  varied  and  flexible 
as  in  the  Sub-committee’s  plan ; 

(6)  and  the  policies  can  be  so  arranged  as  to  discour- 
age resignations  during  years  of  usefulness. 

(7)  Such  a plan  will  cost  the  government  nothing 
beyond  the  expense  of  providing,  under  proper  condi- 
tions and  restrictions,  annuities  for  those  now  in  its 
service,  as  is  contemplated  by  the  Keep  Sub-Com- 
mittee; the  amount  of  each  annuity  being  proportionate 
to  the  length  of  service  already  rendered  when  the  plan 
goes  into  effect  and  its  payment  conditioned  upon  the 
employee  remaining  in  the  service  until  superannuation 
or  permanent  inefficiency  due  to  no  fault  of  the  em- 
ployee. (See  pp.  13-10) 


[REPORT  IN  FULL] 


Report  of  the  Superannuation  Committee  of  the  National 
Civil  Service  Reform  League  on  the  Plan  of  Old 
Age  Pensions  formulated  by  the  Sub-Com- 
mittee of  the  Keep  Committee  on 
Department  Methods* 


THE  FACTS* 

There  has  been  a persistent,  agitation  in  recent  years 
to  secure  the  enactment  of  some  form  of  civil  pension 
or  retirement  annuity  law  to  remedy  the  evil,  asserted  to 
be  very  great,  of  superannuation  in  the  civil  service  of 
the  United  States.  The  Council  of  the  Civil  Service  Re- 
form League  in  1906  made  an  investigation  as  to  how 
far  the  civil  service  law  was  responsible  for  the  ex- 
istence or  alleged  increase  of  superannuation  in  the  ser- 
vice, and  the  cost  to  the  public  treasury  through  the 
inefficiency  of  superannuated  employees.  In  September, 
1906,  the  Council  published  a report  of  its  investigation. 
None  of  its  statements  of  fact  has  been  contradicted. 
Among  these  facts  are  the  following: 

The  civil  service  law  was  passed  in  1883,  and 
for  at  least  three-quarters  of  a century  prior  to  its 
enactment  superannuation  among  the  civil  em- 
ployees of  the  government  had  been  well  known 
and  frequently  commented  upon ; (2) 

Only  5.1  per  cent  of  the  employees  over  65  years 
of  age  now  in  the  service  entered  it  through  com- 
petitive examination;  (2) 

C)  League’s  Superannuation  Report  of  1906,  pp.  2-3. 

0)  Twenty-third  Report  U.  S.  Civil  Service  Commission, 
pp.  11-12. 


The  percentage  of  employees  over  70  years  of  age  in 
the  civil  service  has  remained  about  the  same  since  1893, 
the  only  period  during  which  we  have  official  statistics  on 
the  subject;  (3) 

That  percentage  is  only  1.2%  of  the  executive  civil 
service  throughout  the  country;  (4) 

Under  the  civil  service  law  and  rules,  inefficiency  from 
superannuation  is  ample  cause  for  removal,  and  such 
removals  are  in  fact  made,  to  the  advantage  of  the  ser- 
vice. In  practice,  however,  responsible  officials  hesitate, 
and  always  have  hesitated,  to  make  such  removals,  when 
they  result  in  leaving  old  employees  without  means  of 
support.  But  the  retention  of  employees  in  the  executive 
civil  service  of  the  United  States  is  no  longer  than  in 
the  service  of  such  great  railroads  as  the  New  York 
Central  and  the  New  York,  New  Haven  and  Hart- 
ford;  (') 

At  the  time  of  the  Council’s  investigation  the  separa- 
tions from  the  service  were  taking  place  at  a rate  that, 
if  applied  to  the  whole  service,  would  change  its  per- 
sonnel every  12^4  years;  at  the  rate  now  obtaining  the 
personnel  of  the  service  would  change  every  eight  years ; 
by  far  the  greater  number  of  these  separations  is  due  to 
the  resignations  of  employees  who  have  entered  through 
competition  and  who  find  better  positions  in  private  em- 
ployment; (6) 

The  government’s  civil  employees  over  70  years  of 
age  do  three-fourths  of  the  maximum  quantity  of  work 
performed  by  a thoroughly  efficient  employee;  (7) 

The  government’s  loss  from  inefficiency  of  its  em- 
ployees now  over  65  years  of  age,  expressed  in  salary, 
does  not  exceed  $1,200,000  a year,  a fraction  of  1 % 
of  its  annual  payroll.  (7) 


(3)  20th  Report  U.  S.  Civil  Service  Commission,  p.  168. 

(4)  21st  Report  U.  S.  Civil  Service  Commission,  pp.  29-30. 

C)  21  st  Report  U.  S.  Civil  Service  Commission,  p.  29. 

(e)  22nd  Report  U.  S.  Civil  Service  Commission,  pp.  248  and 
253  and  23  do.,  pp.  12  and  13  and  168. 

(7)  23rd  Report  U.  S.  Civil  Service  Commission,  pp.  n-12. 

Assuming  the  same  relative  efficiency  in  the  service  outside 
of  Washington  for  persons  of  same  age,  the  total  loss  would  be 
$1,200,000.  See  League’s  Superannuation  Report,  1906,  p.  6. 


3 


In  brief,  the  investigation  of  the  Council  proved  that 
the  charge  that  the  civil  service  law  either  caused  or 
aggravated  the  evil  of  superannuation  was  baseless ; that 
the  proportion  of  superannuated  employees  in  the  public 
service  was  very  small  and  was  likely  to  grow  smaller, 
and  that  any  loss  sustained  by  the  government  through 
their  inefficiency  was  a matter  of  very  minor  importance 
compared  with  the  enormous  cost  to  the  public  treasury 
under  any  plan  that  had  been  suggested  of  retiring  them 
on  pensions  or  annuities. 

A NEW  SUPERANNUATION  PLAN  IS  PROPOSED* 

Since  this  investigation  by  the  Council  of  the  Civil 
Service  Reform  League,  the  civil  employees  of  the  gov- 
ernment who  are  advocates  of  old  age  pensions  have  been 
searching  for  a plan  inexpensive  to  the  government  and 
free  from  the  admittedly  grave  objections  to  which  all 
their  previous  plans  were  open.  Sometime  ago  the 
President  appointed  a committee  of  government  officials 
to  investigate  and  report  on  Department  Methods.  This 
committee,  known  as  the  “Keep  Committee”  from  the 
name  of  its  chairman,  has  in  its  turn  appointed  a Sub- 
committee on  Personnel.  This  Sub-committee,  consist- 
ing of  seven  members,  all  civil  employees  of  the  govern- 
ment, has  recently  reported  a civil  pension  plan  which 
it  claims  is  based  upon  the  sound  principle  that  “The 
funds  necessary  for  the  payment  of  the  annuities  should 
be  furnished  by  the  employees  themselves  without  ex- 
pense to  the  government,  other  than  the  payment  by  the 
government  of  a reasonable  rate  of  interest  on  the  money- 
held  by  it,  and  the  payment  of  salaries  to  the  clerical 
force  required  to  keep  the  accounts  and  distribute  the 
fund.”  The  Sub-committee  urges  the  retirement  upon 
annuities  of  aged  civil  employees  of  the  Government  (i) 
to  improve  the  service  by  avoiding  “the  progressive  in- 
efficiency of  aged  employees”  (2)  as  an  act  of  justice, 
since  the  salaries  of  the  government  civil  servants  arc 
seldom  sufficient  “to  enable  them  to  lay  aside  anything 
for  old  age.”  It,  therefore,  recommends  the  enactment 
of  a law  compelling  each  employee  to  lend  a portion  of 
his  pay  each  month  to  the  government  which  is  to  repay 
to  him,  on  his  separation  from  the  service  for  any  reason , 


4 


the  amount  of  these  compulsory  loans  with  interest  at 
four  per  cent,  compounded  annually. 

The  plan  in  its  essential  features  is  as  follows : 

THE  ESSENTIAL  FEATURES 

of  the  Superannuation  Plan  recommended  by  the  Sub-Committee  on 
Personnel  of  the  Committee  on  Department  Methods 
(The  Keep  Committee.) 

First* 

To  every  employee  entering  the  civil  service  after 
this  plan  shall  have  been  enacted  into  law,  and  remaining 
in  the  service  until  he  is  seventy  years  old,  the  United 
States  government  shall  pay  an  annuity  for  the  remainder 
of  his  life.  This  annuity  shall  be  ascertained  by  adding 
together  one  and  one-half  per  cent  of  the  salary  that  he 
has  received  each  year  while  in  the  service.  Thus,  to 
adopt  the  Sub-committee’s  illustration,  if  the  employee 
enters  the  service  at  the  age  of  twenty  and  receives  each 
year  the  same  salary,  the  amount  of  his  annuity  will  be 
precisely  seventy-five  per  cent,  of  his  salary;  e . g.y  \f 
this  salary  was  $1,200,  his  annuity  will  be  $900. 

Second. 

To  provide  the  funds  out  of  which  to  pay  these  an- 
nuities each  civil  employee  shall  be  compelled  to  lend 
the  government  such  portion  of  his  monthly  pay  as  would, 
if  invested  at  four  per  cent,  interest  compounded  an- 
nually, produce,  when  the  employee  is  seventy  years  old, 
a sum  that  would  purchase  the  annuity  in  question  from 
any  solvent  insurance  company  that  issues  annuity  poli- 
cies. Taking  the  same  illustration  as  before,  an  em- 
ployee, who  enters  the  service  at  the  age  of  twenty  and 
receives  $100  from  the  government  each  month  until  he 
is  seventy  years  old,  would  be  compelled  to  make  a month- 
ly loan  of  $3.57  to  the  government.  This  sum  invested 
each  month,  until  he  becomes  seventy  years  of  age,  at 
four  per  cent,  compounded  annually,  would  produce,  at 
the  end  of  fifty  years,  $6,678;  and  anyone  seventy  years 
old  can  buy  an  annuity  of  $900  for  the  rest  of  his  life 
by  paying  $6,678  for  it. 


5 

Third. 


If  the  employee  is  separated  from  the  service  for 
any  reason  before  attaining  seventy  years  of  age,  the 
government  shall  repay  to  him  or  his  estate  in  cash  the 
amount  of  his  forced  monthly  loans,  with  interest  at  four 
per  cent,  compounded  annually. 

If  such  sum  amounts  to  at  least  $1,000  and  he  has 
been  in  the  service  twenty  years  or  more,  or  the  em- 
ployee is  seventy  years  old,  he  has  the  following  options : 

1.  Repayment  in  cash  of  his  monthly  loans  with  in- 
terest at  four  per  cent,  compounded  annually, 

2.  An  annuity  from  the  government  for  the  rest  of 
his  life  equal  to  i^%  of  each  year’s  salary  received, 

3.  Such  an  annuity  from  the  government  for  the  rest 
of  his  life  as  the  accumulated  sum  of  money  would  buy 
from  an  insurance  company,  if  there  be  a proviso  in  the 
pohcy  that,  in  case  the  annuitant  dies  before  this  sum  with 
interest  be  exhausted  by  the  annuities  paid,  the  balance 
shall  be  paid  to  his  estate, 

4.  Such  annuity  as  it  would  buy  for  a fixed  term 
with  no  further  claim  against  the  government  in  case  the 
annuitant  dies  before  the  expiration  of  the  term. 

Fourth* 

Each  employee  not  yet  seventy  years  of  age  already 
in  the  service  when  the  plan  of  the  Keep  Sub-committee 
is  enacted  into  law  shall  be  compelled  thereafter,  precise- 
ly as  if  he  were  a new  employee,  to  lend  the  government 
such  portion  of  his  monthly  pay  as  will  provide  an  an- 
nuity at  seventy  years  of  age  equal  to  one  and  one-half 
per  cent  of  each  year’s  salary  received  after  the  enact- 
ment of  the  law. 

To  cover  the  period  of  his  service  before  the  enact- 
ment of  the  law  the  government  shall  give  as  a pure 
gratuity  to  each  employee — if  he  is  already  seventy  years 
of  age  retiring  him  at  once — an  annuity  equal  to  one  and 
one-half  per  cent  of  his  average  annual  salary  from  the 
government  during  the  ten  years  next  preceding  the  en- 
actment of  the  law,  multiplied  by  the  number  of  years  he 
has  been  in  the  service,  prior  to  the  law’s  enactment. 
If  he  is  not  yet  seventy,  he  must  remain  in  the  service 


6 


until  he  attains  that  age  in  order  to  receive  this  gratuity. 
For  example,  if  when  the  law  is  enacted  he  is  forty 
years  of  age,  has  been  in  the  service  fifteen  years,  and 
during  the  last  ten  years  has  received  an  average  annual 
salary  of  $1,200  the  government  shall  give  him,  as  a 
pure  gratuity,  when  he  is  seventy  years  of  age,  provided 
he  remains  in  the  service  meantime,  an  annuity  equal  to 
fifteen  times  1.5%  (i.  e.  22^/2%)  of  $1,200,  or  $270  a 
year.  This  government  gratuity  to  those  already  in  the 
service,  it  is  estimated  will  cost  from  fifty  to  sixty  mil- 
lions of  dollars  by  the  time  the  last  employee  now  in  the 
service  is  dead.  (8) 

COMMENTS 

On  the  Superannuation  Plan  of  the  Keep  Sub-committee* 

Any  plan  for  old  age  provision  needs  the  most  care- 
ful criticism  before  its  adoption.  Once  adopted,  it  will 
be  regarded  as  in  the  nature  of  a contract  between  the 
government  and  the  employees  entering  the  public  ser- 
vice under  it,  and  it  cannot  well  be  altered  later  in  any 
way  to  make  its  provisions  less  onerous  to  the  taxpayer, 
or  less  advantageous  to  the  employees. 

Direct  Gratuity* 

The  Sub-committee  devotes  a large  amount  of  ex- 
planation and  argument  to  support  of  that  portion  of  its 
plan  which  involves  an  estimated  expenditure  by  the 
government  of  fifty  or  sixty  millions  of  dollars  in  order 
to  put  the  employees  already  in  the  service  on  an  ap- 
proximate parity  with  those  entering  the  government’s 
employ  after  the  plan  is  enacted  into  law.  And,  if  the  rest 
of  its  scheme  will  withstand  careful  examination  and 
reasonable  criticism,  this  recommendation  of  the  Sub- 
committee does  not  seem  to  us  to  be  open  to  serious 
objection.  Indeed,  if,  as  the  Keep  Sub-committee  clearly 
implies,  the  expenditure  of  fifty  or  sixty  millions  of  doi- 

(8)  The  highest  possible  cost  is  estimated  to  be  $66,985,778,  the 
greater  part  of  the  expense  being  incurred  in  the  first  50 
years,  but  resignations  and  removals  among  those  now  in 
the  service  will,  it  is  supposed,  bring  this  total  to  below 
$60,000,000. 


/ 


lars  distributed  through  a long  series  of  years  would  be 
the  only  cost  to  the  government  of  ridding  itself  of  all 
loss  through  the  inefficiency  of  superannuated  employees, 
it  is  possible  that  the  expenditure  mentioned  might  even 
be  an  economic  gain  to  the  taxpayers.  But  those  portions 
of  the  plan  which  are  open  to  most  serious  objection 
and  deserve  the  severest  criticism  are  either  not  dis- 
cussed by  the  Sub-committee  at  all  or  only  very  slightly. 

A Premium  on  Resignations* 

For  example,  it  is  an  integral  part  of  the  Keep  Sub- 
committee’s scheme  that  whenever  an  employee  is  sep- 
arated from  the  government  service  for  any  reason  he 
shall  be  entitled  to  receive  at  once  in  cash  the  entire 
amount  of  his  forced  monthly  loans  to  the  government 
with  four  per  cent  interest  compounded  annually,  and  if 
this  should  amount  to  as  much  as  $1,000  he  has  certain 
further  options  which  we  have  already  mentioned  in 
our  synopsis  of  the  sub-committee’s  scheme.*  This 
is  a direct  inducement  to  and  premium  upon  resignation 
of  the  brightest  and  most  enterprising  of  the  govern- 
ment’s civil  employees.  A pension  system  needs  for  its 
justification  two  distinct  advantages,  first,  it  rids  the 
service  of  the  superannuated,  and  second,  it  tends  to 
keep  in  the  service  the  capable  through  their  years  of 
usefulness  by  offering  them  a greater  pecuniary  advan- 
tage if  they  stay  than  if  they  resign.  Under  the  plan 
which  we  are  examining,  employees  in  the  prime  of  their 
usefulness  get  just  as  much  advantage,  pro  rata , from 
their  loans  to  the  government  if  they  resign  as  if  they 
stay  on.  Indeed,  getting  a lump  sum  at  once,  instead  of 
having  to  wait  for  many  years,  would  be,  to  many  per- 
sons, a distinct  privilege.  In  our  last  report,  we  stated, 
“Any  retirement  scheme  which  provides  for  refunds  is 
objectionable  because  it  puts  a cash  premium  upon  resig- 
nation.” The  Sub-committee  tried  to  meet  this  by  saying 
that  our  objection  was  “predicated  upon  the  theory  of  a 
flat  assessment  of  5%  or  some  such  rate  upon  all  sal- 
aries, and  has  no  application  to  the  plan  of  accumulated 
individual  savings  here  described.”  Our  objection  was 


* See  pages  4 and  5 supra. 


8 


not  based  upon  any  such  flat  rate  assessment  alone ; it 
was  an  intensely  practical  objection.  We  believe  that 
any  plan  through  which  the  government  undertakes  to 
make  provision  for  the  old  age  of  its  employees  should 
furnish  some  inducement  to  prevent  resignations  of  its 
employees  in  the  prime  of  life. 

This  subject  of  resignation  is  no  small  matter.  The 
United  States  Civil  Service  Commission,  in  its  23rd  Re- 
port (p.  12)  complains  of  the  great  'floss  of  valuable 
employees  after  they  have  acquired  experience and  in 
the  last  report  of  the  League  on  superannuation  (in 
1906),  we  called  attention  to  the  fact  that  the  deaths, 
resignations  and  removals  for  the  year  1904-5  (the  latest 
data  then  obtainable),  in  the  competitive  classified  ser- 
vice, amounted  to  over  8%,  the  resignations  alone  being 
nearly  6%  (p.  4).  The  data  for  the  very  next  year, 
1905-6,  show  that  the  percentage  of  separations  has  in- 
creased to  12.6%,  (9)  and  of  resignations  to  nearly 
8%  (9)  ; and  more  significant  still,  this  8%  is  mostly 
among  the  most  capable  in  the  very  prime  of  life,  who 
are  tempted  to  leave  the  service  for  better  positions  out- 
side. To  meet  this  condition,  the  provisions  of  a well 
considered  scheme  should  be  so  planned  as  not  only  to 
weed  out  the  superannuated,  but,  at  the  same  time,  to 
keep  in  the  most  efficient,  and  not  to  give  special  induce- 
ments to  the  most  efficient  to  resign,  and  let  the  least 
efficient,  not  good  enough  to  be  in  demand  outside,  be 
the  only  ones  to  remain  in  the  service  until  old  age.  The 
present  plan,  it  appears  to  us,  even  if  it  should  get  rid 
of  the  superannuated,  tends  at  the  same  time  to  increase 
rather  than  diminish  the  loss  of  the  younger  and  more 
capable  civil  servants. 

Employees  Treated  Separately* 

The  plan  of  the  Keep  Sub-committee  resembles  that 
recommended  in  1901  and  1906  by  the  Council,  in  so  far 

(9)  See  23rd  Report,  U.  S.  Civil  Service  Commission,  p.  13,  for 
number  of  competitive  positions  (average  about  178,000) 
and  p.  168  for  resignations  (13,934)  and  separations 
22,433,  not  including  13,883  by  transfer  of  temporary  ap- 
pointments and  special  cases,  which  are  deducted  from 
the  total  of  36,326  separations  before  figuring  out  the 
12.6  per  cent.) 


9 


as  it  would  compel  employees  to  provide  for  old  age  by 
taking  out  deferred  annuity  policies.  Such  a plan  has 
many  advantages  over  a system  of  direct  pension  or  of 
payment  out  of  a general  fund  made  up  of  deductions 
from  salaries.  The  fact  that  each  employee  is  treated 
separately  very  much  lessens  the  danger  of  increasing 
pensions  en  masse , or  of  repeating  the  experience  of 
other  countries  of  presently  finding  the  general  fund  in- 
sufficient through  unforeseen  burdens  upon  it. 

Incapacity  Before  Retiring  Age  Reached* 

Another  advantage  of  the  proposed  plan,  which  also 
exists  under  the  scheme  proposed,  by  the  League  in  its 
last  two  reports  on  this  subject,  is  the  power  to  get  rid 
of  those  who  become  inefficient  through  ill  health  or  old 
age,  but  who  have  not  yet  reached  the  retiring  age,  with- 
out exposing  them  to  destitution.  This  is  a great  ad- 
vantage over  the  pension  system  as  it  usually  exists, 
where  unless  one  is  allowed  to  stay  until  the  retirement 
age,  (except  in  some  cases  of  injury  incurred  in  the 
service),  old  age  provision  is  lost.  We  learn,  from  ex- 
perienced government  officials  in  the  British  service,  that, 
if  some  such  power  as  this  existed,  it  would  enable  them 
greatly  to  increase  the  efficiency  of  the  government  ser- 
vice. 


Enormous  Cost* 

But  the  Keep  Sub-committee  differs  radically  from 
the  Council  in  recommending  that,  instead  of  an  insur- 
ance company  organized  and  equipped  for  the  purpose 
issuing  the  annuity  policies  as  a part  of  its  ordinary  busi- 
ness, the  United  States  government  should  issue  the 
policies.  Apparently  the  Sub-committee  believes  this  to 
be  an  extremely  simple  and  innocent  proposition,  for  it 
says  that  “the  fund  necessary  for  the  payment  of  the 
annuities  should  be  furnished  by  the  employees  them- 
selves, without  expense  to  the  government,  other  than  the 
payment  by  the  government  of  a reasonable  rate  of 
interest  on  the  money  held  by  it,  and  the  payment  of 
salaries  to  the  clerical  force  required  to  keep  the  ac- 
counts and  distribute  the  fund.” 


IO 


Waiving  all  discussion  of  whether  the  expense  of  a 
clerical  force  competent  and  adequate  “to  keep  the  ac- 
counts and  distribute  the  fund”  would  be  so  slight  as  to 
be  neglegible — though  this  seems  to  us  at  least  doubtful 
when  we  consider  that  these  accounts  will  involve  trans- 
actions with  scores  upon  scores  of  thousands  of  separate 
persons — we  pass  at  once  to  a fundamental  error  of  the 
Sub-committee  which  vitiates . its  entire  scheme. 

The  part  of  the  proposed  plan  to  which  we  wish  to 
call  special  attention  is  the  “reasonable  rate  of  interest” 
to  be  paid  by  the  government  on  all  “loans”  to  it  by  its 
employees  to  establish  annuities.  This  is  passed  over  in 
the  report  as  if  it  were  a small  matter,  the  Sub-committee 
contenting  itself  with  fixing  four  per  cent  compounded 
annually  as  too  obviously  “reasonable”  to  require  argu- 
ment or  explanation  though  it  gives  an  abundance  of 
argument  and  explanation  to  justify  the  expenditure  by 
the  government  of  the  fifty  or  sixty  millions  needed  to 
take  care  of  those  who  may  be  already  in  the  service  when 
the  proposed  plan  is  enacted  into  law,  as  if  these  millions 
would  be,  if  not  the  only,  certainly  the  greatest  part  of 
the  cost  to  the  taxpayer  if  the  sub-committee's  plan  were 
followed.  Now,  the  proposed  plan  contains  no  provision 
for  allowing  these  deductions  from  salary  loaned  to  the 
United  States  government  to  be  invested,  so  as  to  secure 
a net  return  to  the  government.  How  much,  then,  can 
the  government  earn  on  these  loans  to  it?  If  at  any 
time  the  government  does  not  need  to  borrow  these  sums, 
or  any  part  of  them,  how  can  it  be  said  to  have  any 
use  whatever  for  them?  Even  assuming  that  the  gov- 
ernment should  need  to  borrow  these  amounts  of  money, 
it  can  only  save  what  it  would  have  to  pay,  were  it  to 
borrow  equal  amounts  on  its  bonds  in  the  open  market. 
In  other  words,  it  can  afford  to  pay  as  much  interest  to 
its  employees  as  to  other  lenders.  The  proposed  plan, 
once  inaugurated,  will  outlast  all  who  are  now  living  and 
who  shall  say  what  rate  or  rates  of  interest  the  United 
States  will  pay  on  the  money  it  borrows  during  this  long 
period  ? 

Let  us  assume  that  in  the  long  run  the  United  States 
government  may  have  to  pay  as  much  as  2%.  (10) 


(10)  At  present  it  is  paying  less  than  2 per  cent. 


Taking  the  illustration  furnished  by  the  Sub-committee, 
a person  entering  the  service  at  the  age  of  twenty  and 
receiving  a salary  of  $1,200'  a year  till  the  age  of  70 
would  be  entitled  to  a pension  of  $900  a year,  which 
would  cost  $6,678,  or  to  that  sum  in  cash.  To  furnish 
this  $6,678,  $3.57  monthly  or  $42.84  a year  is  taken  from 
his  salary,  amounting  in  all  to  $2,142  in  the  course  of 
fifty  years.  As  calculated  by  the  actuaries  employed  by 
the  Sub-committee,  the  interest  on  these  monthly  loans 
at  4%,  compounded  annually,  amounts  to  $4,536.  In- 
terest at  2%  for  the  same  period,  compounded  annually, 
would  amount  to  only  $1,430.  The  cost  therefore  to  the 
taxpayer  for  this  one  annuity,  above  what  the  govern- 
ment would  be  paying  in  case  it  should  need  to  borrow, 
is  $3,106.  If  the  government  does  not  need  to  be  a bor- 
rower during  any  of  the  period,  then  the  cost  to  the 
taxpayer  of  such  annuity  is  $4,536. 

Now,  how  many  such  cases  are  there  likely  to  be? 
As  to  those  already  in  the  service,  their  ages  are  ascer- 
tained, and  it  can  be  calculated  on  life  tables  how  many 
will  arrive  at  the  age  of  70;  but  even  as  to  them,  no  one 
knows  how  many  will  resign  or  be  removed  before  that 
age ; and  as  to  those  entering  the  service  hereafter,  there 
is  the  further  difficulty  that  their  ages  are  unknown.  It 
is,  therefore,  impossible  to  calculate  exactly  what  this 
cost  will  be.  (u)  We  know,  however,  that  there  are 
184,178  in  the  competitive,  classified  service  now  and 
that  it  is  growing  at  the  rate  of  over  14,000  a year.  (12) 
It  will  not  be  long,  at  the  present  rate  of  increase,  before 
the  competitive  service  alone  will  reach  250,000.  In  the 
practical  working  out  of  this  plan  there  are  other  incal- 
culable factors  of  expense.  The  plan  applies  not  only  to 
those  actually  in  the  service  at  any  given  time,  but  to  all 
persons  who  for  no  matter  how  short  a period  have  been 
in  the  service  after  the  plan  goes  into  effect. 

(1J)  Compound  interest  during  two  periods  of  25  years  each,  for 
example,  is  less  than  during  one  period  of  50  years  on  the 
same  sum  and  at  the  same  rate.  Therefore,  resignations 
and  removals  tend  to  reduce  the  amount  of  compound 
interest. 

(32)  See  22nd  Report,  U.  S.  Civil  Service  Commission,  p.  138, 
and  23rd  Report,  p.  13. 


To  give  a general  idea  of  how  much  these  payments 
of  interest  of  one  kind  or  another  may  cost  the  taxpayer 
under  the  proposed  plan,  let  us  put  it  in  this  way.  Every 
time  the  government  shall  have  complied  with  the  require- 
ments of  the  Keep  Sub-committee  plan  in  a sufficient 
number  of  cases  (through  employees  reaching  the  retiring 
age  or  being  separated  from  the  service  for  any  reason 
before  that  age)  to  make  them  equivalent  to  the  settle- 
ment of  the  demands  of  100,000  employees  as  set  forth 
in  the  Sub-committee's  typical  illustration,  the  taxpayer 
will  have  paid  as  a bonus  or  gratuity  the  huge  sum  of 
$310,600,000  in  excess  of  the  cost  on  the  2%  compound 
interest  basis,  of  borrowing  the  same  amount  of  money 
from  others  than  its  own  employees;  and  should  it  not 
need  to  be  a borrower  the  cost  to  the  taxpayer  would  be 
$465,980,000.  In  comparison  with  these  enormous 
amounts,  the  fifty  or  sixty  million  gratuity  referred  to 
in  the  report  with  so  much  emphasis,  is  a very  insignifi- 
cant matter. 


Added  Expense* 

But  this  is  not  the  only  expense  in  the  way  of  higii 
rates  of  interest.  The  retiring  employees  at  the  age  of 
70,  as  well  as  certain  others  who  may  be  separated  from 
the  service  as  above  explained,  have  under  the  Sub-com- 
mittee's plan  a right  to  an  annuity  based  upon  the  an- 
nuities that  insurance  companies  can  pay.  Those  insur- 
ance companies  now  earn  net  compound  interest  at  4%, 
and  they  calculate  that  they  can  with  certainty  earn,  for 
long  periods  in  the  future,  at  3%  net,  while  the  govern- 
ment earns  nothing  and  can  borrow  at  2%.  Now,  by  the 
plan  of  the  Sub-committee  of  the  Keep  Commission,  as 
already  stated,  annuities  might  be  claimed,  not  only  by 
those  who  have  arrived  at  the  age  of  70,  not  only  in  the 
case  of  railway  mail  clerks  and  letter  carriers,  on  ac- 
count of  the  more  strenuous  demands  on  their  physical 
strength  at  the  age  of  60  or  65,  but  by  anyone  who  has 
been  twenty  years  in  the  service,  and  whose  forced  loans 
to  the  government  at  4%  compound  interest,  amount  to 
$1,000.  Therefore  the  government  may  be  paying 
annuities  to  persons  in  the  prime  of  life,  no  longer  in  its 
service,  the  annuities  to  be  kept  up  during  the  rest  of 


13 


their  earthly  existence,  and  all  on  a higher  basis  of  in- 
terest than  the  government  can  borrow  money. 

Thus  the  government  acts,  under  the  proposed  plan, 
first  as  a savings  bank  for  its  employees,  paying  far 
higher  rates  of  interest  than  it  pays  for  money  it  bor- 
rows from  outsiders  and  then  as  an  insurance  company, 
issuing  annuities  based  on  a greater  rate  of  interest  than 
any  possible  income  on  savings  from  withholding  a part 
of  its  pay  roll.  This  loss  as  a savings  bank  has  been 
mentioned  in  the  Sub-committee's  report  as  a casual  mat- 
ter, hardly  worth  consideration  and  its  loss  as  an  insur- 
ance company  has  been  altogether  overlooked.  Yet  these 
losses  are  serious,  the  savings  bank  loss  alone  running  up, 
as  already  stated,  into  the  hundreds  of  millions. 

It  is  clear  from  the  above  estimates  of  cost  that  the 
indirect  gratuities  in  the  way  of  high  rates  of  interest  will 
many  times  exceed  the  total  saving  from  getting  rid  of 
the  inefficient  superannuated. 

Minor  Criticism* 

Apart  from  the  main  criticism  of  the  great  cost  of 
the  huge  indirect  gratuity  to  its  employees  by  paying 
them  higher  rates  of  interest  than  the  government  pays 
to  others,  there  are  several  relatively  minor,  but  very  im- 
portant criticisms  to  the  Keep  Sub-committee  plan.  For 
example,  why  is  the  direct  gratuity  of  the  government  to 
its  present  employees  based  upon  the  average  salary  of 
the  last  ten  years  instead  of  the  salary  actually  receiv- 
ed during  employment?  To  illustrate,  suppose  a public 
servant  to  have  been  fifteen  years  in  the  service,  that, 
during  the  first  five  years,  his  salary  was  $700  and  for 
the  last  ten  years  had  averaged  $1,300.  Why  should 
the  gratuity  be  based  on  $1,300  a year  instead  of  on 
$1,100,  especially  when  everywhere  else  in  the  plan  the 
annuities  of  the  employees,  both  those  now  in  the  ser- 
vice and  those  entering  hereafter,  are  based  upon  actual 
salaries  received? 

THE  AUSTRALIAN  SYSTEM  RECOMMENDED  AGAIN. 

In  view  of  these  various  considerations  we 
again  recommend  most  emphatically,  should  any 


14 


provision  for  old  age  pensions  be  deemed  neces- 
sary, the  Australian  system  of  requiring  employees 
to  take  out  deferred  annuities  in  solvent  insurance  com- 
panies, engaged  in  the  annuity  business,  which  can  earn 
fair  rates  of  compound  interest  on  safe  investment  of  the 
sums  paid  them,  instead  of  making  the  government  a 
combined  savings  bank  and  insurance  company,  at  an 
enormous  loss,  as  in  the  proposed  plan  of  the  Keep  Sub* 
Committee. 


Not  Arbitrary, 

The  Australian  method,  which  we  have  recommended 
is  criticised  by  the  Sub-committee  of  the  Keep  Commit- 
tee as  “forcing  employees  to  purchase  annuities  from 
insurance  companies  under  arbitrary  conditions,  and  at 
prices  that  might  be  exorbitant.”  The  conditions  need 
be  no  more  arbitrary  than  those  contained  in  the  plan 
of  the  Keep  Sub-committee,  which  would  have  the 
United  States  government  act  as  the  insurance  company. 
In  our  report  issued  in  1901,  we  suggested  several  op- 
tional forms  of  insurance,  of  which  the  employee  mighr 
avail  himself.  In  our  report  of  1906,  we  referred  only 
to  the  cheapest  and  most  essential  form,  without  by  any 
means  limiting  it  to  that  form  alone. 

Cost  to  Employees  Commercially  Reasonable, 

The  more  serious  objection  that  the  price  might  be 
exorbitant  leads  us  to  enlarge  on  some  ideas  we  only 
suggested  in  our  last  report.  No  small  part  of  the  cost  of 
insurance,  arises  from  the  solicitation  of  agents,  the  ad- 
vertisements, the  persuading  people  that  it  is  to  their  in- 
terest to  insure,  and  the  collection  of  the  premiums.  All 
of  these  heavy  items  of  cost  would  be  eliminated  if  the 
Australian  plan  were  adopted.  And  the  government  before 
accepting  for  its  employees  the  policies  of  any  insurance 
company  could  require  the  company  not  only  to  make  de- 
posits of  investments  with  the  United  States  Treasury  to 
secure  the  payment  of  the  policies,  but  also  to  make 
rates  that  are  reasonable  both  to  the  companies  and  to 
the  insured,  in  view  of  the  greatly  lessened  expense  to 


i5 

the  company  of  transacting  this  class  of  business.  (13) 
With  a view  of  securing  better  rates  for  this  class  of 
insurance  for  persons  of  moderate  means,  a law  has  been 
recently  passed  in  Massachusetts  allowing  savings  banks 
to  undertake  the  business  of  i^uing  oi  l age  policies. 
This  law  promises  to  work  well.  If  it  does,  ic  will  doubt- 
less be  extended  to  other  states,  and  we  shall  have  in  it 
just  what  is  wanted  to  secure  reasonably  priced  policies 
under  the  Australian  system. 

Practicability* 

If  existing  insurance  companies,  or  future  savings 
bank  insurance  departments  cannot  be  found  to  make 
suitable  policies  at  reasonable  rates,  the  government 
might  charter  a company  for  this  purpose,  just  as  it  has 
chartered  national  banks.  This  company  could  be  com- 
pelled to  deposit  securities  with  the  United  States  Treas- 
ury, to  be  subject  to  United  States  inspection,  and  to  be 
limited  in  its  investments  to  safe  classes  of  securities, 
just  as  the  savings  banks  in  several  of  the  states  are  so 
limited  by  law.  We  are  told,  on  very  good  authority, 
that  such  a company  could  easily  be  started  on  the  same 
basis  that  savings  banks  are  started,  viz : certain 
guaranty  funds  to  be  furnished  by  the  founders  and 
ultimately  withdrawn,  all  the  net  profit,  above  a reason- 
able return  on  these  guaranty  funds  inuring  to  the  bene- 
fit of  the  government  employees  insured.  But  there  is 
no  doubt  that  existing  companies  can  be  found  which 
would  make  such  special  (14)  and  reasonable  rates  to  the 
government  employees  for  the  business  is  a large  one, 
well  worth  bidding  for ; the  approval  by  the  govern- 
ment of  a company  as  safe  for  this  work  would  be  a 
valuable  advertisement  for  any  company;  and  if  this 
plan  works  well  with  the  government,  railroads  and 
other  corporations  employing  large  numbers  of  persons 

(t3)  To  be  sure  the  commissions  paid  agents  on  securing  an- 
nuities are  less  than  those  paid  for  securing  life  insurance, 
yet  the  saving  is  considerable. 

(u)  Existing  laws  prevent  special  rates,  even  in  the  District  of 
Columbia,  but  an  act  of  Congress  must  be  had  for  such  a 
scheme,  provision  could  be  made  in  it  allowing  a special 
rate  authorized  by  the  government  for  this  special  class  of 
business. 


would  be  likely  to  adopt  it,  which  would  bring  in  still 
more  of  this  special  kind  of  business  to  the  companies. 


Flexibility, 


As  to  the  forms  and  details  of  the  annuity  policies,  if 
it  is  deemed  best  to  require  that  all  moneys  with  interest 
compounded  at  fair  rates  or  in  other  words  the  cash 
value  of  the  policies  should  be  returned  to  the  employee 
or  his  estate  on  death,  or  separation  on  the  ground  of 
inefficiency  caused  by  illness  before  the  regular  retiring 
age,  such  provision  could  be  inserted  in  the  policies.  We 
should  strongly  urge,  however,  that  resignation  or  re- 
moval for  any  other  cause  than  permanent  inefficiency 
due  to  old  age  or  ill  health,  (for  example,  resignation  to 
secure  a better  position  elsewhere,  or  removal  for  mis- 
conduct or  wilful  neglect)  should  entitle  only  to  a paid 
up  policy,  based  on  premiums  already  paid,  to  be  good 
at  the  retiring  age  only,  with  the  option  of  carrying 
the  policy  to  the  full  amount  by  additional  payments. 
Also,  options  might  be  given  to  those  retiring  at  full  age, 
or  under  a certificate  of  permanent  inefficiency,  either 
for  the  cash  value  of  their  policies  as  they  stand  at  the 
time,  or  an  annuity  with  certain  payments  to  be  made,  as 
suggested  in  the  report  of  the  Sub-committee  of  the  Keep 
Commission.  Thus  we  should  have  a system  as  flexible 
as  that  proposed  in  the  plan  we  are  now  criticising,  with- 
out any  cost  to  the  government,  except  such  as  might  be 
incurred  by  the  government  itself  in  assuming  the  expense 
of  providing  under  proper  conditions  and  restrictions  for 
annuities  for  those  now  in  its  service,  the  amount  of 
each  annuity  being  proportioned  to  the  length  of  service 
already  rendered  when  the  plan  goes  into  effect  and  its 
payment  conditioned  upon  the  employee  remaining  in  the 
service  till  superannuation  or  permanent  inefficiency,  due 
to  no  fault  of  the  employee,  just  as  in  the  Sub-commit- 
tee's plan ; and  we  should  have  a system  which  would 
check  the  rapidly  growing  number  of  resignations  among 
the  most  efficient  employees  of  the  government. 


Horace  E.  Demino. 
Richard  Henry  Dana, 
Henry  W.  Hardon, 
Lucius  P>.  wSwift, 


j 


Committee. 


